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Wipro: Growth picks up

Oct 22, 2013

Wipro Ltd has announced its results for the second quarter of the financial year 2013-2014 (2QFY14). The company has reported a 12.9% QoQ growth in sales and a 19% QoQ growth in net profits. Here is our analysis of the results.

Performance summary

Consolidated net sales grew by 12.9% QoQ during the quarter.

Operating (EBITDA) margin improved by 2.1% YoY to 22.8% during the quarter as compared to 20.7% seen during 1QFY14. On an absolute basis, operating profits grew by 23.9% QoQ in the quarter.

Net profits grew by 19% QoQ. The growth in net profits was a result of good performance at the operational level.

Employee strength fell marginally and stood at 147,216 at the end of September 2013.

Gross employee utilization rate was higher at 66.1% during the quarter as compared to 64.7% seen in the previous quarter (1QFY14). Net employee utilization (excluding trainees) improved to 74.3% from 73.3% seen during 1QFY14.

Consolidated financial performance

(Rs m)

1QFY14

2QFY14

Change

1HFY13

1HFY14

Change

Gross revenues

97,332

109,907

12.9%

184,827

207,239

12.1%

Expenditure

77,129

84,869

10.0%

145,021

161,998

11.7%

Operating profit (EBITDA)

20,203

25,038

23.9%

39,806

45,241

13.7%

Operating profit margin (%)

20.8%

22.8%

21.5%

21.8%

Finance and other income

3,362

3,412

1.5%

5,343

6,774

26.8%

Finance expenses

495

656

32.5%

1,826

1,151

-37.0%

Depreciation

2,501

2,616

4.6%

5,003

5,117

2.3%

Exchange difference

1,867

Profit before tax

20,569

25,178

22.4%

40,187

45,747

13.8%

Tax

4,251

5,754

35.4%

8,467

10,005

18.2%

Profit for the period from continuing operations

16,318

19,424

19.0%

31,720

35,742

12.7%

Profit after tax for the period from discontinuing operations

2,215

Profit for the period

16,318

19,424

19.0%

33,935

35,742

5.3%

Minority interest

84

103

22.6%

161

187

16.1%

Net profit available to equity shareholders

16,234

19,321

19.0%

33,774

35,555

5.3%

Net profit margin (%)

16.7%

17.6%

18.3%

17.2%

No. of shares (m)

2,465.1

Diluted earnings per share (Rs)*

27.6

P/E ratio (x)*

18.6

What has driven the performance in 2QFY14?

In 2QFY14 Wipro has delivered revenue growth of 12.9% QoQ. However in the growth in constant currency terms was on the lower side at 3.2% QoQ.

The IT Services and IT product segments witnessed growth of 12.7% QoQ and 14.8% QoQ respectively.

Revenue breakup (In Rs m)

(In Rs m)

1QFY14

2QFY14

Change

Based on businesses

IT Services

89,363

100,679

12.7%

IT products

8,166

9,374

14.8%

Others

(183)

(133)

In terms of service offerings, Business application services and product engineering services witnessed the highest growth rates of 14.8% and 14.2% QoQ. These were followed by global Infrastructure services and Analytics and Information Management, which grew by 12.7% QoQ and 11.2% QoQ respectively. Application development and maintenance and BPO witnessed the slowest growth in the quarter of 10.5% QoQ and 10.1% QoQ respectively.

In terms of industry verticals, the highest growth came in from the 'Healthcare and Lifesciences' and 'Media and Telecom' verticals which recorded growth of 16% QoQ and 15% QoQ respectively. These were followed by 'Manufacturing' and 'Finance services' with growth of 12.2% QoQ and 12.1% QoQ respectively. 'Energy & Utilities' and 'Retail & Transportation' verticals grew the slowest in the quarter with growth of 11.7% QoQ and 10.9% QoQ respectively.

IT services revenue breakup

(Rs m)

1QFY14

2QFY14

Change

Based on geography

US

44,413

50,138

12.9%

Europe

25,915

29,096

12.3%

India and Middle East

7,864

8,356

6.3%

Rest of the world

11,170

13,088

17.2%

Based on service offerings

Application development and maintenance

18,498

20,438

10.5%

Technology infrastructure services

21,626

24,364

12.7%

Business application services

27,971

32,117

14.8%

Product Engineering & Mobility

6,702

7,652

14.2%

Analytics and Information Management

6,702

7,450

11.2%

BPO

7,864

8,658

10.1%

Based on verticals

Global Media & Telecom

12,198

14,022

15.0%

Finance Solutions

23,692

26,570

12.1%

Manufacturing & Hi-tech

17,029

19,100

12.2%

Healthcare, Life Sciences & Services

8,767

10,174

16.0%

Retail & Transportation

13,449

14,916

10.9%

Energy and Utilities

14,228

15,897

11.7%

The company's operating margins improved to 23.9% from 20.7% in the previous quarter (1QFY14). The operational performance was driven by good revenue growth as well as better control over employee costs and sub-contracting costs.

At the bottomline level, the net profits grew by 19% QoQ. This was slower that the growth in the operating profits due to higher finance costs as well as an increase in the effective tax rate during the quarter. Effective tax rate increased from 20.7% in the previous quarter to 22.9% in this quarter.

What to expect?

At the current price of Rs 514.9, the stock is trading at a multiple of 18.6 times its trailing 12 month earnings.

Wipro had a decent quarter in 2QFY14 driven by a modest 3.2% QoQ growth in revenue in constant currency terms. The management stated that they were looking to get back to industry level growth rate of about 5% QoQ in constant currency terms by the end of the financial year. However they said that they would still have to work on attaining growth at that level.

The impact of the wage hike given by Wipro on 1st June, 2013 was not felt at the operating level due to the rupee depreciation and better operational efficiencies.

The management sounded confident that the broad based growth seen in this quarter could be sustained but cautioned that it would not be possible for all verticals to grow at a fast pace in every quarter.

The company added 45 new clients in the quarter but the management stated that their focus would be to win large deals and not just increase the number of clients.

The management has stated that the improvement in the operating margins could only be sustained if the growth in revenues would pick up. This is because further improvements in operational efficiency would not be able to contribute a lot more to an improvement in operating margins.

While the long term prospects of Wipro are good, we believe that most of the upside is already factored in at the current valuations. Therefore we maintain our 'Sell' view on the stock.

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